Acordia of Ohio, L.L.C. v. Fishel

• Decision Date: 24 May 2012
• Docket Number: No. 2011–0163.,2011–0163.
• Citation: Acordia of Ohio, L.L.C. v. Fishel, 133 Ohio St.3d 345, 978 N.E.2d 814 (Ohio 2012)
• Parties: ACORDIA OF OHIO, L.L.C., Appellant, v. FISHEL et al., Appellees.
• Court: Ohio Supreme Court

133 Ohio St.3d 345

978 N.E.2d 814

2012 -Ohio- 2297

ACORDIA OF OHIO, L.L.C., Appellant,

v.FISHEL et al., Appellees.^*

No. 2011–0163.

Supreme Court of Ohio.

Submitted Nov. 15, 2011.

Decided May 24, 2012.

Katz, Teller, Brant & Hild, James F. McCarthy III, and Laura Hinegardner, Cincinnati, for appellant.

Denlinger, Rosenthal & Greenberg, L.P.A., Mark E. Lutz, and Michael P. Majba, Cincinnati, for appellees.

Taft Stettinius & Hollister, L.L.P., W. Stuart Dornette, John B. Nalbandian, and Ryan M. Bednarczuk, Cincinnati, urging reversal for amici curiae Ohio Chamber of Commerce and Ohio Chemistry Technology Council.

Beckman Weil Shepardson, L.L.C., and Peter L. Cassady, Cincinnati, urging reversal for USI Holdings Corp. and USI Midwest, Inc.

Benesch, Friedlander, Coplan & Aronoff, L.L.P., and Jennifer Turk, Columbus, urging reversal for Willis of Ohio, Inc.

Hylant Group, Inc., and Michelle Lafferty, urging reversal for Hylant Group, Inc.

Jones Day, Robert P. Ducatman, and Meredith M. Wilkes, Cleveland, urging reversalfor amicus curiae PNC Financial Services Group, Inc.

Fortney & Klingshirn and Neil Klingshirn, Akron; and Gregory Gordillo, Cleveland, urging affirmance for amicus curiae Ohio Employment Lawyers' Association.

LANZINGER, J.

[Ohio St.3d 345]{¶ 1} In this appeal, we are asked to consider whether the ability to enforce an employee's noncompete agreement transfers by operation of law to the surviving company when the company that was the original party to the agreement merges with another company. We hold that in this case, the language of the agreement dictates that the surviving company cannot enforce the agreement after the merger as if it had stepped into the shoes of the original company.

I. Facts

A. Background

{¶ 2} As a condition of their employment with the insurance-services company that eventually became known as Acordia of Ohio, Inc. (“Acordia, Inc.”), ¹ appellees Michael Fishel, Janice Freytag, Mark Taber, and Sheila Diefenbach (collectively, “the employees”) entered into noncompete agreements by which they agreed to forgo competition with Acordia, Inc. for two years after termination of their employment there. Fishel's noncompetition agreement, for example, provides:

In consideration of my employment and its continuation by Frederick Rauh & Company ( hereinafter, Company) I hereby covenant as follows:

A. For a period of two years following termination of employment with the company for any reason, I will not directly, indirectly, or through association[Ohio St.3d 346]with others solicit, write, accept or in any other manner perform any services relating to insurance business, insurance policies, or related insurance services for any of the following;

(1) Any individual or entity for whom the company has written, accepted, or in any other manner performed any services relating to insurance business, insurance policies, or related insurance services at any time while I was employed by the Company;

(2) Any individual or entity whose name was provided me as a prospective client at any time while I was employed by the Company.

B. For a period of two years following termination of employment with the company, I will not encourage nay [sic] other employees of the company, directly, indirectly, or through association with others to leave the Company's employment.

(Emphasis added.) It is significant that this agreement of noncompetition does not contain language that extends to other employers, such as the company's “successors or assigns.” The other employees signed nearly identical noncompetition agreements, the only differences consisting of formatting changes, the substitution of company names, and the dates. All agreements at issue were signed between 1993 and 2000.

{¶ 3} Frederick Rauh & Company became known as Acordia of Cincinnati, Inc. after its acquisition by Acordia, Inc. in 1994. Fishel began his employment with Frederick Rauh in 1993. Freytag and Taber began employment with Acordia of Cincinnati, Inc. before it merged with other Ohio companies to become Acordia of Ohio, Inc. in 1997. Diefenbach signed her noncompete agreement with the successor company, Acordia, Inc., in July 2000.

{¶ 4} Wells Fargo acquired Acordia, Inc. in May 2001. As part of this acquisition, the employees were required to complete several standard forms, including an acquisition-employment application, a United States Department of Justice employment-eligibility-verification form, a background-investigation authorization form, and a new-hire team-member acknowledgment form.

{¶ 5} Seven months later, Acordia, Inc. underwent a merger with appellant, Acordia of Ohio, L.L.C. (“the L.L.C.”). Following the merger, only appellant remained. The employees continued to work for the L.L.C. until August 2005, when they began employment with appellee Neace Lukens Insurance Agency, L.L.C. (“Neace Lukens”). They soon used their contacts to recruit multiple customer accounts from the L.L.C. to Neace Lukens. Within six months, 19 customers had transferred $1 million in revenue to Neace Lukens from the L.L.C.

[Ohio St.3d 347]B. The Lawsuit

{¶ 6} The L.L.C. filed suit for injunctive relief and money damages in September 2005 against the employees, Neace Lukens, Neace and Associates Insurance Agency of Ohio, Inc., and Joseph Lukens, all appellees. The complaint claimed that the employees had violated their two-year noncompete agreement and would misappropriate the L.L.C.'s trade secrets. After reviewing the evidence presented at preliminary-injunction hearings, the trial court denied the L.L.C.'s motion for a preliminary injunction. The First District Court of Appeals affirmed the trial court's decision, holding in part that a preliminary injunction was unwarranted because Acordia, Inc. and the employees did not intend to make the noncompete agreements assignable to successors such as the L.L.C. Acordia of Ohio, L.L.C. v. Fishel, 1st Dist. No. C–060292 (May 9, 2007). The trial court granted the employees' motion for summary judgment, and the L.L.C. appealed, arguing in part that the noncompete agreements signed by the employees had transferred to the L.L.C.

{¶ 7} The court of appeals affirmed the trial court's decision to grant summary judgment in favor of the employees. Acordia of Ohio, L.L.C. v. Fishel, 1st Dist. No. C–100071, 2010-Ohio-6235, 2010 WL 5275169. The court explained that while noncompete agreements transfer from the predecessor company to the successor company by operation of law after a merger, the employees' noncompete agreements pertained only to the specific companies with which they had originally been employed. Id. at ¶ 13–20. Because the previous iterations of Acordia, Inc. had been merged out of existence more than two years before the employees left the L.L.C., the court of appeals concluded that the agreements had expired when the employees left and that the L.L.C. had no right to enforce them. Id. at ¶ 17–18.

{¶ 8} The L.L.C. appealed, and we accepted its proposition of law that states, “Pursuant to Ohio's merger statutes, agreements between employees and employers that contain restrictive covenants are assets of the constituent company that transfer automatically by operation of law in a statutory merger from the constituent company to the surviving company and are enforceable by the surviving company according to the agreements' original terms as if the surviving company were a party to the original agreements.” Acordia of Ohio, L.L.C. v. Fishel, 128 Ohio St.3d 1458, 2011-Ohio-1829, 945 N.E.2d 522. We reject that proposition and affirm the judgment of the court of appeals.

II. Legal Analysis

{¶ 9} The pivotal question is whether the noncompete agreements apply only to the original contracting employer or whether after the merger, the L.L.C. may enforce the noncompete agreements as if it had stepped into the shoes of those original contracting employers.

[Ohio St.3d 348]A. The Contract Assets

{¶ 10} R.C. 1701.82 provides that a company's assets transfer to the new company after a merger:

(A) When a merger or consolidation becomes effective, all of the following apply:

* * *

(3) The surviving or new entity possesses all assets and property of every description, and every interest in the assets and property, wherever located, and the rights, privileges, immunities, powers, franchises, and authority, of a public as well as of a private nature, of each constituent entity * * *.

Because the statute specifies that the new company takes over all the previous company's assets and property after the merger, it is clear that employee contracts transfer to the resulting company. In this case, the employees' contracts came under the control of the L.L.C. after it merged with Acordia, Inc.

{¶ 11} Nevertheless, although the L.L.C. assumed control of the employees' contracts after the merger, we agree with the First District Court of Appeals that the L.L.C. may not enforce the noncompete agreements as if the L.L.C. had stepped into the shoes of the company that originally contracted with the employees. Appellant's proposed outcome would require a rewriting of the agreements. By their terms, the noncompete agreements are between only the employees and the companies that hired them.

{¶ 12} We have previously explained that when a merger between two companies occurs, one of those companies ceases to exist: “[A] merger involves the absorption of one company by another, the latter retaining its own name and identity, and acquiring the assets, liabilities, franchises and powers of the former. Of necessity, the absorbed company ceases to exist as a separate business entity.” Morris v. Invest. Life Ins. Co., 27 Ohio St.2d 26, 31, 272 N.E.2d 105 (1971). After the L.L.C. absorbed Acordia, Inc., the companies with which the employees agreed to avoid competition had ceased to exist. Because the noncompete agreements do not state that they can be assigned or will carry over to successors, the named parties intended the agreements to...